THE WORLDs TOP 100 AEROSPACE & DEFENCE COMPANIES

2012

September 2012
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CANDESIC TOP 100 AEROSPACE & DEFENCE COMPANIES 2012

FACTS & FIGURES

Consolidation at the top of the industry pyramid has slowed down Total A&D revenues of the top 100 A&D companies in the world amounted to $681Bn in 2011. This is only 17% more than five years ago in 2007 but 71% more than nine years ago in 2003. This reflects a slowdown in the industry consolidation process, at least at the top of the industry pyramid. Indeed, between 2008 and 2011, only three M&A transactions within the top 100 companies took place, to be compared with eleven transactions during the preceding four-year period (2004-2007):

Nevertheless, some consolidation did occur, primarily at the bottom and in the middle of the industry pyramid (below $5Bn revenues), but not as much as one might expect. In fact, overall, the industry has become less concentrated, with the top 10 players accounting for only 53% of the total top 100 A&D revenues in 2011, down from 57% five years earlier and 60% nine years earlier. In 2011, 80% of the total top 100 A&D revenues were accounted for by the top 34 companies, while in 2003, it was accounted for by the top 25 companies only. The recently announced takeover of Goodrich by United Technologies will be the first M&A transaction involving two of the top 20 players in the world since the creation of EADS in 2000 (and in the US since the merger between AlliedSignal and Honeywell in 1999), and may trigger a new wave of consolidation among the large tier one aerospace suppliers.

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2003 Top 100 A&D Industry Pyramid

(number of companies by revenue bracket)

2011 Top 100 A&D Industry Pyramid

(number of companies by revenue bracket)

5 7 17 19

9 6 12

>$20Bn $10-20Bn $5-10Bn

39 47

$2-5Bn $1-2Bn

30 4

<$1Bn

Revenue growth has also slowed down The average revenue growth of the top 100 A&D players has slowed down significantly as well over the last five years. It was 33% between 2007 and 2011 (6% CAGR) compared to 65% between 2003 and 2007 (12% CAGR). CAGR) Companies within the Top op 100 which have experienced the biggest increase in their A&D revenues between 2003 and 2011 include Triumph (461%), Mantech (309%), Precision Castparts (299%), Meggitt (258%), Harris (254%), Hindustan Aeronautics (253%), Zodiac Aerospace (212%), Esterline Technologies (206%), BE Aerospace (301%) and L-3 L 3 Communications (200%). (200%) The firms that have progressed the most significantly in the rankings over the 2003-2011 2003 period are Harris (from 44 to 26), Precision Castparts (from 52 to 33), Triumph (from 77 to 43), 4 Mantech (from 66 to 47), BE Aerospace (from 75 to 55) 5 and Meggitt (from 84 to 64). Moog (from 100 to 78), 7 Ultra Electronics (from 98 to 85) 8 and Esterline Technologies (from 83 to 74) 7 have also impressively progressed up the rankings. Interestingly, most of these fast-growing fast companies are positioned similarly in the value va chain, as major tier 1 or tier 2 merchant merchant suppliers and have also been typically very profitable over the last decade. This suggests a kind of sweet spot in the industry pyramid where well positioned and ambitious players can enjoy the benefits of both sustained growth and profitability. .

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Three Chinese companies, two spin-offs and one consulting firm are newcomers in 2011 Among the newcomers for 2011 (compared to 2007) are two recent US spin-offs: Huntington Ingalls (out of Northrop Grumman) and Exelis (out of ITT). Additionally, we have decided to include for the first time three public subsidiaries of Chinas state enterprise AVIC, as well as consulting services firm Booz Allen Hamilton which has become a much more specialized defence services player (more than 50% of their revenues) since the spin-off of its commercial consulting arm.

The industry, while still dominated by North American and West European companies, is becoming more global The industry is still dominated by North America and Western Europe, with respectively 46 and 34 companies in the Top 100, but an increasing number of countries outside these two regions are represented in the Top 100. In 2011, eight countries outside Western Europe and North America had players (20 of them) in the Top 100: Japan (5), Russia (3), China (3), India (2), Israel (3), Singapore (2), South Korea (1) and Brazil (1). Turkey might soon join the list, with Aselsan and Turkish Aerospace Industries now just outside the Top 100. This rewards the significant investments made by these countries in their A&D industry over the last 10 to 20 years. Nevertheless, while their number is increasing (from 15 in 2007), their share of revenues is still marginal: 9% (up from 6% in 2007), to be compared with 57% and 34% for North American and West European players respectively. Within Western Europe, the most represented countries are the U.K. (ten companies), followed by France and Germany (seven each, eight including EADS), and Italy (three). Spain has only one company left Navantia - in the Top 100 (two if one takes into account the Spanish share in EADS), as Indra and ITP, which used to be in the Top 100, are currently out of it.

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2011 Top 100 A&D Companies by Region

(number of companies)
3% 3% 1% North America Western Europe 13% 46% Asia (South East and Far East) Middle East and Eastern Asia Russia Brazil

34%

2011 Top 100 A&D Companies by Region

(aggregated sales)
1% 1% 2% 5% North America Western Europe Asia (South East and Far East) 34% 57% Middle East and Eastern Asia Russia Brazil

The industry leadership is very stable, with only one change in the top 10 The top 3 A&D companies have not changed over the last nine years: Boeing has remained the largest in the world with $69Bn of sales, followed very closely by EADS ($68Bn) and, relatively far behind, Lockheed Martin ($46Bn). BAE Systems is currently the fifth largest A&D company in the world but even further behind, generating only 40% of Boeings or EADS revenues. Only one changed occured in 2011 in the Top 5: Northrop Grumman has been replaced by General Dynamics as the fourth largest player following its divestiture of Huntington Ingalls. In the Top 10, nine players have remained the same throughout the last decade: Boeing, EADS, Lockheed Martin, BAE Systems, Northrop Grumman, General Dynamics, Raytheon, United Technologies and General Electric. The new kid on the block is Finmeccanica which climbed into the top 10 following its acquisition of DRS Technologies, replacing Thales.

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2011 A&D Sales: World's Top 20

(USD millions) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0

Among institutional and financial investors, BlackRock is the most active, being a major shareholder (i.e. holding more than 5% of the capital) in 30 of the top 100 A&D companies Blackrock and State Street Bank are by far the most active institutional investors in the A&D sector. Only accounting for companies where they own more than 5% of the capital, Blackrock is a major shareholder in thirty of the top 100 A&D companies. On aggregate, it owns the equivalent of $22Bn in sales, which, if it was an industrial group, would make it the 9 largest A&D player in the world. State Street Bank is a major shareholder in only seven companies but, on aggregate, owns more than $26Bn worth of sales, which would make it the 7 largest A&D player in the world. This is due to particularly high stakes held in large players like Boeing, Lockheed Martin, Northrop Grumman or United Technologies. The French Government is also a major and influential shareholder in five companies (EADS, Thales, Safran, DCNS, Nexter) for the equivalent of a combined sales amount of $28.2Bn, which makes it in essence the 6 largest A&D player in the world. Other governments with significant shareholdings in top 100 A&D companies include Russia (three companies, $6.8Bn in aggregate sales), Italy (two, $7.3Bn), Spain (two, $5.9Bn), Israel (two, $5Bn in sales), China (three, $3.5Bn) and India (two, $3.8Bn).
th th th

Private equity ownership of leading A&D companies has become pervasive Seven of the top 100 A&D companies are currently owned by private equity funds: Avio by Cinven, SR Technics by Mubadala Development Company, Hawker Beechcraft by Goldman Sachs and Onex, Fokker Technologies by Arle Capital (formerly Candover) and Booz Allen Hamilton, Arinc

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and Sequa by The Carlyle Group. The Carlyle Group thus confirms its leadership among private equity firms involved in the A&D industry, having also owned major stakes in several other top 100 A&D companies in the past, including Vought Aircraft Industries (sold to Triumph), Avio (sold to Cinven), Howmet (now part of Alcoa), United Defense (sold to BAE Systems) and Qinetiq. Other top 100 companies having been under private equity ownership in the past include L-3 Communications, Spirit Aerosystems, MTU Aeroengines and Transdigm. This confirms the role that private equity firms can play as catalysts for corporate transformation or industry consolidation. Meanwhile, only three companies are still privately owned by the founding family and are all to be found in Germany: Diehl (Diehl family), Krauss Maffei Wegmann (Bode family) and Liebherr (Liebherr family).

The balance between commercial and defence revenues is stable The split between commercial and defence revenues has been remarkably stable since 2003, with 59% of the aggregated revenues of the top 100 A&D companies coming from defence / government customers and 41% coming from commercial customers. The average defence commercial split is 57%-43%. There are 27 pure play defence companies (with defence and government revenues accounting for at least 95% of their total A&D revenues), but only 13 pure play commercial companies (with commercial revenues accounting for at least 95% of their total A&D revenues). While Lockheed Martin is the largest defence company by far with about 50% more defence sales than its nearest follower Boeing ($46Bn vs. $31Bn), EADS is also by far the largest commercial aerospace company with 36% more commercial revenues than its nearest follower, Boeing ($52Bn vs $38Bn).

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The level of specialization among the top 100 A&D companies is high and has been increasing slightly On average, A&D sales account for 76% of the total sales of the companies in the Top 100; this shows a fairly high level of specialization among the top players. This figure is slightly up from 72% in 2003. For fifty eight of the companies, A&D sales account for more than 90% of their total sales. Not surprisingly, the level of specialization is higher at the top of the pyramid (84% for the top 30) than at the bottom (70% for the bottom 50). On the other end of the spectrum, for twelve companies in the Top 100, Aerospace & Defence sales represent less than 20% of the total enterprises sales: Volvo (2%), ThyssenKrupp (3%), Fuji Heavy Industries (5%), Mitsubishi Electric (6%), Eaton (10%), General Electric (13%), Liebherr (13%), Alcoa (14%), Navistar (14%), Kawasaki Heavy Industries (16%), Parker Hannifin (16%), and Mitsubishi Heavy Industries (18%).

Aircraft manufacturing and Services are the largest sub-sectors In 2011, Aircraft Manufacturing (design and integration of complete aircraft, including UAVs) and Services (including MRO / aftermarket, aircraft services, IT & cybersecurity, training & simulation, technical services) were the two largest sub-sectors in terms of revenues, each representing around 26% of all top 100 A&D revenues. The figure has been stable over the last nine years for aircraft manufacturing, while the share of services is significantly up, from around 18% in 2003. This increase is mainly due to the development of outsourced defence services, in particular in the United States, but it is also partially due to a reclassification as service revenues of some revenues which were historically not captured as such (e.g. aftermarket revenues), thus reflecting the increased importance of services in the industry and the emergence of dedicated business units within companies to support services growth. Underlying this trend is the acknowledgement that new business models are needed to complement and sometimes replace traditional platform-centric business models in order to find new growth engines and to compete more effectively with new manufacturing players from countries such as China, India, Brazil or South Korea. It is worth mentioning that a big chunk of Services revenues (around one third) is essentially a captive MRO business for aircraft equipment OEMs and airlines. The third largest sub-sector is Aircraft Sub-Systems and Components (including aircraft engines, avionics, aerostructures, materials), representing 18% of all A&D revenues in 2011. This figure has been stable over the last nine years.

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Next comes Defence Electronics & Communications with 12% of total sales, slightly down from 14% in 2003. Other declining sectors have been Weapon Systems & Ammunitions (5%, down from 7% in 2003) and Space (4% down from 7%). Naval Systems (shipbuilding) has remained relatively stable around 4% while the share of Land Systems (vehicles and equipment) has increased from 2% in 2003 up to 3.5% in 2011. Security revenues (excluding cybersecurity which is included in IT services) are still very marginal among top A&D players, accounting for around 1% of all revenues. Only a few companies (such as BAE Systems, Safran, Thales, L-3 Communications, ST Engineering, Saab and Alliant Techsystems) have developed a significant security business.

2011 Top 100 A&D Revenues by Sub-Sector

Aircraft Manufacturing

4% 4% 5%

4% 1%
Services Aircraft Sub-Systems and Components Defence Electronics & Communications Weapon Systems & Ammunitions Space Naval Systems

26% 12%

18%

26%
Land Systems Security

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Candesic Top 100 Aerospace & Defence Companies 2012

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Candesic Top 100 Aerospace & Defence Companies 2012 (Continued)

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Candesic Top 100 Aerospace & Defence Companies 2012 (Continued)

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Notes:

2011 sales data relate to the latest financial year for which full financial results have been published. For most companies (80), the latest financial year ended between December 2011 and March 2012. Overall though, 2011 sales data for a given company refer to a period ending between August 2011 and July 2012, depending on the companys financial year-end. When the latest financial year revenues were not available, previous available sales figure has been used (this is the case for Arinc and Sequa, for which 2011 sales figures could not be found) When data (such as commercial / defence split) were unavailable or could not be found, they have been estimated (shown in italic in the table). The split between commercial sales and defence/government sales has been indicated in the table by showing the share of defence / government sales. The share of commercial sales simply adds up to 100%. Revenue numbers for non US companies have been converted in USD at the interbank exchange rate of the end of the latest financial year (e.g. EUR/USD: 0.719, GBP/USD: 0.624) For companies involved in sectors other than A&D, A&D sales have been derived or estimated from the breakdown and information provided by the company in its financial reports or other publicly available corporate documentation. For each company, A&D revenues have been broken down into nine standardized business segments (subsectors): Aircraft manufacturing (design and integration) Aircraft sub-systems and components (incl.l aircraft engines, avionics, aerostructures, materials) Services (MRO/aftermarket, aircraft services, IT & cybersecurity, training & simulation, technical services) Weapon Systems (incl. ammunitions) Defence Electronics & Communications Space (launchers, satellites) Naval Systems (shipbuilding) Land Systems (vehicles & equipment) Security

The breakdown into these sub-sectors has been derived or estimated from the breakdown and information provided by the company in its financial reports or other publicly available corporate documentation. When not available, the breakdown has been estimated. Information about major shareholders and selected shareholdings is typically up-to-date as of the latest annual financial statements. Some companies generating enough revenues from the A&D sector to be potentially included in the Top 100 have nevertheless been voluntarily kept out of the list as we believe that the nature of their business is too different from the rest of the companies in the sector, namely: Private military contractors (e.g. Dyncorp) Generalist consulting, facilities management, project management and IT/ICT firms (e.g. CSC, Serco, Fluor, KBR, Bechtel, Jacobs Engineering, HP)

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CANDESIC TOP 100 AEROSPACE & DEFENCE COMPANIES 2012

About Candesic Candesic is an innovative management & strategy consultancy, combining both proven strategy consultants trained in the worlds top management consultancy firms, and a broad network of technical and industry experts that allows us to go beyond what other consultancies can traditionally offer. Our consulting experience gives clients access to top-tier problem solving and strategic analysis skills whilst our industry expertise ensures projects stay grounded in reality, generating actionable and practical advice. Our main areas of expertise are healthcare, technology & telecom, and aerospace, defence & security. We manage a tight network of 150 leading consultants and industry experts and have offices in London, Paris, and Madrid, as well as affiliate offices in 20 major cities in Europe and beyond.

About Candesic Aerospace, Defence & Security Practice Candesic has accumulated years of experience in Aerospace, Defence and Security. The practice has among its clients some of the largest A&D players in the world as well as numerous small-tomedium-sized companies. The practice has also been working with private equity firms to support their acquisitions in the industry, either through due diligence work or strategy advisory services. Our team is made up of seasoned professionals with an experience of the industry both as managers and consultants. Our unique model combines insider-like industry expertise with outside-in strategic perspective to bring innovative sometimes disruptive, yet always practical, insights to our clients. For more information, please contact Antoine Glain, Practice Leader, at agelain@candesic.com or at +44 (0) 79 9097 4145

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